Should you be shorting iron ore stocks?

The bulls are going up but the bears are selling out. Where does that leave investors?

Owen Raszkiewicz

Owen Raszkiewicz is a Motley Fool Contributor. Owen has been a Contributor since 2013, having also spent time as a Fool writer/analyst. He also worked as an Investment Analyst at Zenith Investment Partners, Australia's top research house specialising in managed funds. Owen has appeared on Channel 10's The Project and was invited on the BBC. He holds a Masters of Applied Finance, Masters of Financial Planning, Bachelor of Technology, Advanced Diploma of Financial Services and Diploma of Mortgage Broking Management. In addition, Owen has passed Level 1 of the Chartered Financial Analyst (CFA) Program. He has taken the Banking + Finance Oath (BFO). When he is not writing, Owen is Managing Director of Rask Finance, an Australian financial education company. You can email him: [email protected].

Published August 20, 2013 2:03 pm AEST

At current levels the top end of town is looking overpriced, and compared to this time a year ago the entire S&P/ASX 200 (ASX: XJO) (Index: ^AXJO) is looking more expensive.

Up until recently, one group of stocks that had fallen from grace are iron ore plays such as Atlas Iron (ASX: AGO), Fortescue (ASX: FMG) and, to some extent, Rio Tinto (ASX: RIO) and BHP (ASX: RIO). Now, a resilience in iron ore prices has got some bulls thinking that the recent upwards trend can continue.

Source: Google finance

A few months ago, I said that pure play iron ore stocks should be avoided. Despite the strong gains in the past three months, I stand by my contention because nothing has made me change my mind.

The dangers of a volatile commodity price is still lingering, slowing Chinese demand is apparent and many believe a huge iron ore glut awaits the market. Today the Sydney Morning Herald reported that BlackRock, one of the world's biggest mining investors, sold nearly of $60 million of Australian and Brazilian iron ore stocks – perhaps a sign of their expectations in the stock prices or commodity itself.

Earlier this year, Goldman Sachs predicted a huge oversupply of the steel making ingredient in coming years would result in a price around $80 per tonne whilst Macquarie was slightly more bullish at $88 per tonne. Either way, the reduced price will put pressure on iron ore stocks, including our largest players like Rio and BHP, for whom iron ore remains one of their most lucrative products.

Foolish takeaway

Taking a short position on iron ore stocks might be a smart way to take advantage of the perceived overvaluation of our miners but like any type of investing you've got to consider your tolerance for risk. This Fool isn't buying or shorting iron ore stocks but instead looking for great yielding shares that are cheap and can be held for 5 or 10 years.

One such stock is The Motley Fool's favourite income idea for 2013-2014. Check out our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."

More reading

Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.

Automatic Renewal

By taking up this offer, you will also be enrolled in our auto-renewal program, which is our way of making your ongoing subscription easier by ensuring uninterrupted service. Don't worry, though – you're not locked in, and can cancel your auto-renewal at any time before each 'anniversary' date without question or penalty.